Understanding Credit: Borrowing Wisely and Maintaining a Good Credit Rating

1. Credit Chapter 10

2. 10.1 What is Credit? • Credit - the ability to borrow money in return for a promise of future repayment. • Never borrow more money than you can easily repay! • Using credit • for owning a home (called a mortgage) is almost essential. • For education • For health

3. When to Borrow • Some people do not use credit wisely. They borrow for what they want. Then, when they really need to use credit, they are unable to get a loan. • Or, they take on more debt then they are able to repay.

4. Before you borrow, ask yourself • Is it important that I buy now? • Do I have to borrow? • Can I afford the payments? • Will I be able to buy other products I want more if I borrow now? The interest you will pay on the purchase could be used to buy other things you want. Is it worth the sacrifice?

5. 10.2 How to Qualify for Credit • Credit Worthiness - a measure of your reliability to repay a loan. The 3 C’s for Credit Character – your sense of financial responsibility Capacity – ability to repay Capital – value of what you own

6. Credit history – record of your borrowing & repayments. • Paying bills on time is the most important factor. • Work steadiness. • Mobility. • Attendance. • Savings. • Co-sign – agree to repay the loan if the you don’t.

7. Your Credit Rating • Credit rating • Payment history • Current debt • Length of credit history • New accounts & inquiries • Kind of credit you use

8. Credit Bureaus – collect credit information & sells to lenders. • The three largest • TransUnion • Equifax • Experian

9. 10.3 Sources of Consumer Credit • Two forms: loans and credit card accounts • Loans • Secured – backed by something of value, “collateral” • Unsecured • Banking Institutions as sources of loans • Finance companies • Life insurance companies • Credit card cash advances • Pawnbrokers • Rent-to-Own Companies

10. Credit Cards • Regular charge accounts – must be paid in full each month, no interest • Revolving charge accounts – balance may be carried over month to month with minimum payment, pay interest • Grace period – the time between the billing date and the payment due date when no interest is charged • Credit Card costs • Annual Fees • Interest • Credit limits • Penalties

11. Control credit card costs • Use a loan as an alternative • Don’t just pay the minimum payment • Choose the least expensive card – annual fees, percentage rates

12. 10.4 Credit Rights and Responsibilities • Truth in Lending – 1968 • all banks must calculate credit costs the same way • must provide finance charge & annual percentage rate • Equality in Lending – may not discriminate based on: • Sex • Color • Race • Religion • marital status • age

13. Rights (cont) • Protect Your Credit History – you have access to your credit history & may amend mistakes to it • Resolve Billing and Product Quality Problems – may withhold payment if you believe there is a mistake • Protection from Abusive Collection Practices

14. Responsibility • Act Responsibly • Know your debt capacity • Self-control • Pay more than the minimum • Avoid too many credit cards • Pay cash • Keep records

15. 10.5 Maintaining a Good Credit Rating • Do not miss a payment • Save regularly • Married couple – establish some credit separately • Common Mistakes • Pay on time • Don’t skip a payment – call institution immediately for unusual circumstances

16. Read what you sign • Acceleration clause – entire debt is due if you miss a payment • Balloon Payments – final payment much larger than the scheduled payments • Bankruptcy – when you cannot pay debts & must surrender property. • The court sells the property to pay the debts. • Carried in credit history for 10 years. • True-Name Fraud – stolen identity to open charge accounts • The business is responsible to pay the charges.

17. Protect Yourself from Fraud • Never give your SS# unless absolutely necessary. • Keep your records in a safe. • Keep track of your bills.